As the number and dollar volume of Initial Coin Offerings (“ICOs”) continue to increase, the SEC has taken a greater interest in this activity. As we previously reported, the SEC issued its initial ICO guidance on July 25, 2017. In this guidance it declared that depending on the facts and circumstances, an ICO offering may involve the offer and sale of securities. If that is the case, the offer and sale of virtual coins or tokens must itself be registered with the SEC, or be performed pursuant to an exemption from registration.
The SEC just recently provided an Investor Alert on public companies making ICO-related claims. In this Alert, the SEC has indicated that ICOs may provide fair and lawful investment opportunities, there may be situations in which companies are publicly announcing ICO or coin/token related events to affect the price of the company’s common stock. The SEC indicated that it may suspend trading in a stock when the SEC is of the opinion that a suspension is required to protect investors and the public interest. Circumstances that might lead to a trading suspension include:
- A lack of current, accurate, or adequate information about the company – for example, when a company has not filed any periodic reports for an extended period;
- Questions about the accuracy of publicly available information, including in company press releases and reports, about the company’s current operational status and financial condition; or
- Questions about trading in the stock, including trading by insiders, potential market manipulation, and the ability to clear and settle transactions in the stock.
The SEC went on to note that it recently issued several trading suspensions on the common stock of certain issuers who made claims regarding their investments in ICOs or touted coin/token related news. It further warned investors to be aware of pump-and-dump and market manipulations.
ICOs have proven to be tremendously popular, but with this has come increased SEC scrutiny. This is an evolving area of the law and requires companies to proceed with due care to avoid ending up on the wrong side of an SEC enforcement.